In this guide
What a partial exchange is
Section 1031 defers gain on what you exchange — and only on what you exchange. Reinvest every dollar of value and replace every dollar of debt, and the whole gain defers. Reinvest less — keep some cash at closing, or buy a replacement worth less than what you sold — and the exchange doesn't fail; it simply becomes partial. Under §1031(b), you recognize gain to the extent of the non-like-kind value you received, and the rest stays deferred.
Mechanically nothing exotic happens: your qualified intermediary distributes the cash slice to you under the exchange agreement (typically at closing of the relinquished property, or after the exchange period for unspent funds), and the balance moves into the replacement. The planning question isn't whether you can do it — it's whether the tax on the slice is a price worth paying, and that turns on arithmetic that surprises most sellers.
The math: gain first, basis last
The single most expensive misconception in partial exchanges: “I put $500,000 into this property, so the first $500,000 I take out is just my own money coming back.” That is exactly backwards. Boot is taxed as gain first — every dollar you keep is recognized gain until you've recognized your entire realized gain, and only after that do withdrawals become tax-free return of basis. Keep $100,000 from a sale with $400,000 of gain and you pay tax on the full $100,000 — not on a quarter of it, not on none of it.
The formula is the same one the boot guide develops in detail: recognized gain = the lesser of (a) total boot received — cash kept, plus debt not replaced after netting fresh cash — and (b) your total realized gain. A partial exchange is simply deliberate boot: same computation, chosen in advance instead of discovered at tax time.
A worked example
Sell a $1,500,000 building with a $585,000 adjusted basis (after $340,000 of depreciation) and $90,000 of selling costs — realized gain $825,000. You want $150,000 in hand and roll the rest into replacement property, replacing all remaining debt:
| Full exchange | Partial — keep $150,000 | Taxable sale | |
|---|---|---|---|
| Cash in hand at closing | $0 | $150,000 | $1,410,000 minus tax |
| Recognized gain | $0 | $150,000 | $825,000 |
| Tax due now (TX resident)* | $0 | ~$40,200 | ~$213,350 |
| Effective rate on cash taken | — | ~26.8% | ~25.9% of gain |
| Gain still deferred | $825,000 | $675,000 | $0 |
*Recapture-first ordering: the $150,000 recognized is treated as $150,000 of the $340,000 unrecaptured §1250 layer — 25% federal — plus 3.8% NIIT where applicable. A California seller adds up to 13.3% state on top (see the 50-state table). Assumptions per our methodology.
Notice what the partial buys: $150,000 of liquidity for roughly $40,200 of tax, while $675,000 of gain rides on. Whether that's a good trade depends entirely on what the alternative costs — which is where most partial-exchange analysis should actually start.
Why small partials get taxed at 25%
Recognized gain doesn't take its character pro-rata — it comes off the top of the stack, and unrecaptured §1250 depreciation sits on top. On a long-held property, the depreciation layer is often larger than the cash people want to take out, which means the entire partial is taxed at the 25% recapture rate plus NIIT and state tax — not at the 15–20% capital-gains rate sellers price in their heads. A $50,000 cash-out from a heavily depreciated property is a ~28.8%-plus event, not a 15% one. The calculator's Boot & Partial mode applies the ordering automatically.
The refinance alternative — often the better answer
The question a good CPA asks before blessing a partial: “Why not borrow it instead?” Complete a full exchange, then do a cash-out refinance of the replacement property after closing. Loan proceeds are not income — the cash arrives tax-free, the full gain stays deferred, and the interest may be deductible against the property's income. The same $150,000 that costs ~$40,200 through a partial costs ~$0 in tax through a refi — you pay interest instead, which at 7% runs about $10,500 a year and is a business expense rather than a sunk tax.
Two cautions. First, sequence matters: refinancing the relinquished property on the eve of the sale, or the replacement as a pre-arranged step of the exchange, invites the IRS to treat the loan proceeds as disguised boot — the cleanest fact pattern is an independent refinance after the exchange settles, on its own business timeline. Second, a refi requires the property to support the debt; DST investors, for example, can't refinance a trust-held interest — exchangers heading into passive replacement property who want liquidity usually take it as a partial at closing, which is one of the few cases where the partial is structurally the only door.
When a partial is the right call
The honest list is short and specific: you need cash and the replacement can't be leveraged (the DST case above); you're deliberately de-risking — taking chips off the table at a known tax cost while deferring the bulk; the gain is modest relative to the cash need, so the tax on the slice is small; or you're trading down on purpose — a smaller replacement suits the next decade, and the value gap is a priced decision rather than an accident. In each case the discipline is identical: compute the tax on the slice before closing, not after — a partial entered knowingly is a strategy; the same numbers discovered in April are a mistake (that's the boot guide's territory).
And one case where a partial is usually wrong: when boot approaches your total gain. If you're keeping so much that recognized gain nearly equals realized gain, you're paying full tax and full exchange costs — QI fees, the 45/180-day gauntlet — for a sliver of deferral. Below that line, sell taxably and skip the mechanics.
The “lazy 1031” alternative
You'll hear the term in investor forums: a “lazy 1031” skips the exchange entirely — sell taxably, then offset the gain with paper losses from buying other real estate the same tax year, usually first-year depreciation accelerated by a cost-segregation study and bonus depreciation. No intermediary, no deadlines, no like-kind rules, free choice of what to buy. The catch is that it only works if the losses are actually usable against the gain — which runs through the passive-activity rules, real-estate-professional status, and whatever bonus-depreciation percentage current law allows in the year you sell. For a full-time investor with a big acquisition pipeline it can genuinely beat an exchange; for a passive owner it frequently produces suspended losses and an unsheltered gain. It's a CPA conversation, not a blog decision — but it belongs on the same decision sheet as the partial and the refi.
Reporting: Form 8824 and your new basis
A partial exchange is reported on Form 8824 like any exchange, in the year the relinquished property closed. The form computes realized gain, recognized gain (your boot), and — the part people forget — the carryover basis of the replacement property: your old basis, plus new money in, minus deferred gain. The deferral isn't forgiveness; it's a lower basis and therefore smaller depreciation deductions and a bigger built-in gain in the replacement, waiting for the next exchange — or for the step-up at death that ends the story under current law. If the sale straddles year-end with proceeds received in the following year, installment-sale interaction under §453 can shift which year the boot is taxed — a genuine planning lever on November and December closings that pairs with the tax-return deadline trap.